Tenants, receivers benefit from retail-center foreclosures

by Max Jarman The Arizona Republic Apr. 18, 2010 12:00 AM

In metro Phoenix's underoccupied, financially stressed shopping centers, the remaining tenants face yet another challenge.

Besides their own financial woes linked to the worst recession in decades, they often have to cope with their landlord's problems.

Rising vacancies and declining values have prompted many landlords to postpone improvements, cut back on maintenance and scrap marketing plans aimed at drawing traffic to the developments.

Tenants, many of whom have requested rent reductions themselves, are frustrated with the lack of attention.

The stress is endemic in retail real estate. Phoenix commercial real-estate-brokerage Marcus & Millichap Inc. estimates that one-half of the 1,753 Phoenix-area retail centers it tracks, ranging in size from 5,000 to 300,000 square feet, could be in trouble because their owners owe more than the property is worth.

The centers were slammed when too much borrowing and aggressive building collided with collapsing housing markets and tight credit.

The recession and abrupt halt in consumer spending prompted many retail stores to close. In outlying areas where retail centers were built in advance of neighborhoods that never materialized, tenants never moved in.

The foreclosure process, so familiar from the housing market, is under way at troubled retail centers. But in this case, retail tenants can benefit. As centers fall into foreclosure, they are getting new landlords who are willing to listen and to take action.

The new managers are court-appointed receivers who take over and try to stabilize troubled shopping centers as they move through various phases of foreclosures, bankruptcies and loan workouts.

The new landlords are cleaning up unkempt parking lots and landscaping, making repairs and in some cases cutting tenants more favorable lease terms.

It's a booming new business that struggling commercial real-estate agents, property managers and others are vying to enter.

Stability from 'Dr. Phil'

Tenants in Gilbert, Glendale and around the Valley, who had been ignored by previous landlords, say they are finally seeing action from the court-appointed receivers of their centers.

Sam Szeto, owner of the Dragon Wok restaurant at 727 W. Ray Road in Gilbert, was close to moving out of Cooper Square before Resolute Commercial Services was appointed receiver of the center, which is now about 50 percent vacant.

The anchor, Albertsons, closed several years ago and other tenants steadily bailed.

Szeto said the landlord did little to draw traffic to the center and refused to negotiate more favorable lease terms or provide signage.

"I was hanging on by myself," he said.

When Resolute became the receiver late last year, the company renegotiated more favorable lease terms with Szeto and erected a sign for the Dragon Wok on Cooper Road.

"Our job is to stabilize the center and retain the viable tenants," Resolute principal John Mitchell said. Resolute is the receiver for seven retail centers, including Cooper Square.

Szeto has committed to another five years at Cooper Square and is hopeful Mitchell can do something to draw more tenants and business to the center.

Paradise Bakery often complained to its landlord about the dirty parking lot and unkempt landscaping at its 67th Avenue and Beardsley Road location in Glendale.

It got no action until Sierra Real Estate Solutions was named receiver for the center this year.

"We were able to make them happy," said Adrian Evarkiou, Sierra's director of real estate.

He explained that receivers don't have the constraints many financially strapped landlords have and can get things done.

Mitchell added, "We listen to the tenants' issues and concerns and try to correct the most immediate problems."

Sometimes maintenance and security issues have been neglected. Those can include pest infestations, burned-out lights and broken plumbing.

Often, many of the tenants are behind in their rent, and the receivers work with them to correct the situation. Sometimes that includes a rent reduction or postponement.

"We work with tenants that are viable, but it's not a 'get out of jail free' card," Mitchell said.

He acknowledged the job entails a lot of hand-holding and crisis management.

"It's a third legal issues, a third property management and a third Dr. Phil," Mitchell said.

Growing problem

Real-estate brokerage CB Richard Ellis estimates the retail vacancy rate in metro Phoenix now hovers around 12 percent, up from 9.7 percent a year ago and under 5 percent in 2006.

Retailers that remain in business have demanded lower rent and landlords have generally obliged, fearing more vacancies.

The average asking rent at the end of the first quarter was $16.61 per square foot, according to CB Richard Ellis, down from $17.37 at the end of the year and $18.54 a year earlier.

David Wetta, director of Marcus & Millichap's national retail group, said the rising vacancies, falling rents and a general decline in real-estate prices have caused the value of some shopping centers to drop as much as 50 percent.

"That puts a lot of them underwater," he said, using the term meaning they owe more than the center is worth.

Marcus & Millichap reports there are currently 80 Phoenix-area retail centers in foreclosure proceedings and 40 already have been taken back by lenders. With an estimated 875 properties underwater, the 120 in trouble now could be the tip of the iceberg.

Wetta believes the number will increase significantly over the next few years as lenders get more aggressive with delinquent borrowers.

"If you bought or refinanced a retail property between 2005 and 2007, you are likely in trouble," he said.

Wetta said lenders generally have been giving slack to delinquent commercial borrowers but such forbearance eventually could come to an end.

Wetta believes it could be two to three years before better-positioned retail centers recover to past occupancy levels and values. Recovery could take three to five years for developments in outlying areas where growth has stalled, he said.

Business opportunity

While the downturn has been disastrous for lenders, shopping center owners and commercial real-estate agents, it has created an unprecedented opportunity for receivers. The bleak forecast could keep them for busy for years.

A dozen or so companies offer receivership services in the Valley, and people are increasingly trying to get into the business.

It's a boom-or-bust business that runs counter to real-estate cycles.

Receivers saw little work while real-estate prices soared for most of the past 15 years.Besides retail centers, the receivers, who often have a background in real estate or property management, are running apartment complexes, hotels, office buildings and even companies.

It's a natural opportunity for commercial real-estate agents, whose deals dried up in 2008 and haven't come back.

There are no licensing or certification requirements as barriers to entry. Evarkiou said it's a business based on referrals and reputation that favors those already providing the service.

Evarkiou, a commercial real-estate agent, moved into receiverships a year ago after struggling to make a living leasing and selling commercial properties.

Mitchell, who has worked for a number of lenders doing loan workouts, started Resolute two years ago when he saw the opportunity emerging. He spent the 1990 real-estate bust buying foreclosed property from the Resolution Trust Corp. for U-Haul Corp.

Tenants, receivers benefit from retail-center foreclosures